Download Cost-benefit analysis (2)

Module 6
Costing, assessing and selecting
options and measures
Country-led environmental and climate
change mainstreaming
Linking policy, costing and budgeting
Mainstreaming of environment and
climate change in policies, strategies &
programmes
Identification of environmental
integration and climate change adaption
& mitigation options
Costing, assessment and selection of
options
Resource allocation: Integration of
environmental and climate change
(adaptation & mitigation) measures in
budgets
2
Tools for costing and assessing
environmental and climate change options
3
Common types of costs
e.g. removal of
subsidies
costs e.g. training,
recruitment, …
e.g. protected areas
costs e.g. salaries,
recurrent costs…
e.g. sanitation
facilities
costs e.g.
construction,
ongoing operations…
Reform
measures
Transitional
costs
Management
measures
Operational costs
Infrastructure
measures
Capital costs
4
Valuing the environment: statedpreference methods
• Stated-preference approaches
- Contingent valuation
• Asking respondents how they would behave if a
‘market’ existed: ‘Willingness to Pay’ (WTP) and
‘Willingness to Accept Compensation’ (WTA)
- Choice experiment method
• Questionnaire based on choice over pairs of attributes
• Responses analysed with statistical model
5
Valuing the environment: other
approaches
• Revealed-preference approaches
- Hedonic pricing method
• Relationship between housing market prices and
environmental attributes
• Production-function approaches
- Environment valued as an input to the production of a
market-valued good or service, e.g. effects of increased
ozone on agricultural crops
- Ecosystem service valuation models
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Many services are public goods
Economic
Valuation
Spiritual &
religious
Aesthetic
?
Difficult or
impossible
?
Flood/Fire
regulation
Disease regulation
?
?
Water purification
?
Climate regulation
Freshwater
?
Genetic Resources
Recreation &
tourism
Fiber
Food
Source: Based on Mayaux (2006)
Environmental
economy
?
?
?
Easy
?
Classical economy
?
Economic Value ($)
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Cost-benefit analysis: identifying
costs and benefits
Environmental and CC adaptation/
mitigation measures
Costs: extra costs incurred compared with the ‘businessas-usual’ scenario, reduced economic growth opportunities
Benefits:
-Avoided damage and losses
-Extra developmental benefits compared with ‘businessas-usual’ scenario
-Energy cost savings
-Sales of carbon credits
-Positive environmental and related health/livelihoods
outcomes (including health expenditures savings)
-Strategic and competitive advantage (e.g. organic
products)
Can you
think of
some
examples?
For environmental measures, internalisation of externalities is a
MUST, but can often be complex to achieve
[risk of simplification in detriment of environment]
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$400
0
Public Net
Private
NetPresent
PresentValue
Valueper
perhectare
hectare
198
199
7
9
$1,000 to $3,600
Mangrove: $91
$-5,400 to $200
Shrimp Farm: $2000
Value
(per hectare)
Coastal
Protection
(~$3,840)
$2000
0
Net: $2,000
(Gross $17,900
less costs of
$15,900)
Fishery nursery
Source:
Less
subsidies (($70)
UNEP
$1,700)
Timber and NonMangrove Conversion
Pollution Costs (timber products
$230)
($90)
Restoration (Shrimp Farm
Mangrove
Source: Millennium Ecosystem Assessment;
Sathirathai and Barbier 2001
$8,240)
Cost-benefit analysis (1)
• Cost-benefit analysis (CBA):
• Quantifies all the costs and benefits (*) of an intervention
(with benefits including both ‘positive’ benefits and
avoided losses) over the entire lifetime of the intervention
• A ‘discount rate’ is applied to all costs and benefits to
represent ‘preference for the present’ or simply the
opportunity cost of capital -> calculation of ‘present value’
• The higher the discount rate, the smaller the present value
• The further away in the future, the smaller the present value
• Significant controversies over the ‘right’ discount rate for
assessing long-term options
(*) Actually the ‘incremental’ costs and benefits, i.e. the difference in costs/benefits
between a ‘with intervention’ and a ‘no intervention’ scenario
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Cost-benefit analysis (2)
Outputs of cost-benefit analysis:
Cost-benefit ratio (CBR)
Ratio of costs to benefits calculated
at their present value (the smaller,
the better – should be <1)
Net present value (NPV)
Benefits minus costs calculated at
their present value (the larger, the
better)
Internal rate of return
(IRR)
The discount rate at which NPV = 0
A measure of the ‘benefitgenerating power’ of the option or
intervention (the larger, the better)
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CBA example: wind farm (1)
•
•
•
•
•
•
•
•
Small-scale wind farm in scenic area
Initial construction costs: $750,000
Construction time: 1 year
Annual maintenance costs: $5,000
Life-span on project: 15 years
Dismantling and site restoration costs: $35,000
Market value of electricity produced: $150,000/yr
Results of contingent valuation study (visual impact):
• Mean annual compensation demanded:
$25/household
• 2,000 households affected
• Discount factor: 6%
• Annual costs: $55,000 ($25 x 2000 + $5000)
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Source: Hanley et al (2013)
Year
Discount factor
(1.06)-t
0
1
1
0.9433
2
Present
value of
benefits ($)
Costs
($)
Present
value of
costs ($)
0
750,000
750,000
150,000
141,495
55,000
51,881
0.8899
150,000
133,485
55,000
48,944
3
0.8396
150,000
125,940
55,000
46,178
4
0.7921
150,000
118,815
55,000
43,565
5
0.7472
150,000
112,080
55,000
41,096
6
0.7049
150,000
105,735
55,000
38,769
7
0.6650
150,000
99,750
55,000
36,575
8
0.6274
150,000
94,110
55,000
34,507
9
0.5918
150,000
88,770
55,000
32,549
10
0.5583
150,000
83,745
55,000
30,706
11
0.5267
150,000
79,005
55,000
28,968
12
0.4969
150,000
74,535
55,000
27,329
13
0.4688
150,000
70,320
55,000
25,784
14
0.4423
150,000
66,345
55,000
24,326
15
0.4172
150,000
35,000
14,602
Total discounted
Benefit
s ($)
1,394,130
13
1,275,779
Cost-effectiveness analysis
• Costs valued in monetary terms, and benefits quantified in
‘physical’ units over the entire lifetime of the intervention;
a discount rate is applied to both
• Allows calculating unit costs, as the ratio of total discounted
costs to total discounted benefits obtained
• The obtained unit costs support:
• comparison of several options
• comparison with ‘benchmark costs’ for similar interventions
• CEA suitable where difficult to assign monetary value to
benefits
• But requires identifying a single, all-encompassing measure of benefits
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Illustration of CEA: Global GHG
abatement cost curve
Source: McKinsey (2009), Exhibit 8, p. 17
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Example: land-based mitigation
options
Significant
mitigation
potential
for
developing
countries
Atmosphere
CO2
CH4
N2O
CO2
Forests
Net sink (tree
biomass + soil
organic matter)
Typically costeffective and
requiring low
upfront
investment
Peatlands
Largest & most
efficient
terrestrial store
of carbon
biomass
Grasslands
Net carbon sink
if not degraded
Improved ecosystem
management also
supports adaptation
Cultivated
systems
Both a sink and a
source of GHGs,
net balance
depends on
cultivation
methods
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Basis for private
sector decision
making
Financial and economic analysis
• Both CBA and CEA support:
• financial analysis: considers the ‘monetary’
costs and benefits (or equivalent) accruing to
parties directly concerned by a project or
programme, at their ‘face value’
• economic analysis: broadens the analysis to
more accurately reflect costs and benefits to
society
Basis for public
sector decision
making
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Complementary tools
• For the assessment of robustness and the
integration of uncertainty, CBA/CEA can be
combined with:
• the use of multiple scenarios (e.g. ‘no change’ scenario
and various climate change and development
scenarios)
• sensitivity analysis (i.e. testing of the effect of changes
in scenario assumptions on the CBR, NPV, IRR or unit
costs)
• risk analysis (-> risk probability analysis includes the
probability of occurrence of various cost and benefit
outcomes in calculations... assuming probabilities are
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known)
Tools for prioritising and selecting measures
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Supporting decision making
• CBA/CEA support the financial and economic
assessment of options
• They help identify measures that offer the best ‘value
for money’ – a key aspect in situations of budgetary
constraints
• Other types of assessment and other criteria
(e.g. technical, social, environmental) are
required to fully inform decision makers
• Must take into account pro-poor implications
Multi-criteria analysis (MCA) helps
integrate various criteria
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Multi-criteria analysis (1)
• An approach to decision support that uses
more than one criterion to assess performance and
rank various options or interventions
• The term actually covers a wide range of methods
• Typically:
• various options or interventions are assessed against a predetermined set of criteria
• qualitative ratings or quantitative scores are given
• rules are then applied to rank options/interventions
• Numerical scores can be added up to calculate a total score
(with the possibility of applying different weights to different
criteria)
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Multi-criteria analysis (2)
• MCA is a useful complement to CBA/CEA
• Allows combining financial/economic criteria with
technical, environmental and social ones
• It can be used on its own, or in combination with
CBA/CEA:
MCA before CBA/CEA
MCA after CBA/CEA
Allows reducing the number of
options to which CBA/CEA is
applied
CBA/CEA helps eliminate
financially or economically
unviable options, then MCA
allows for final selection based
on extra criteria
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Multi-criteria analysis: example
• How to analyse environmental consequences of
integrated farming vs organic farming
• Possible criteria:
• Emissions of NH3 at air causing acidification
• Losses of NO3- causing groundwater pollution
• Losses of biocides causing toxicity issues
Potatoes
Nitrates
(kg/yr)
Ammonia
(kg/yr)
Biocides
(kg/yr)
Integrated farming
4.1
0
0.4
Organic farming
5.3
1.0
0
(hypothetical ex)
We need weighing and criteria to make a decision!
Source: Kroeze and Fortuin (nd)
Multi-criteria analysis: example (2)
• Criteria have different dimensions
e.g. cost, deposition levels, area of damage
• Criteria differ in weight
e.g. critical loads for acidification may be exceeded
to a larger extent than targets for eutrophication
• Weights depend on ‘vision’
e.g. some problems may be prioritised over others
• Qualitative and quantitative information
Source: Kroeze and Fortuin (nd)
Example of MCA grid
Option
Effectiveness
Cost
Technical
feasibility
Social &
cultural
acceptability
Env’l
impacts
Total
score
Option 1
Option 2
Option 3
Option 4
Scores: from 1 (poorest performance) to 4 (highest
performance). As far as cost is concerned, a scale should be
established, with scores corresponding to a given cost range or
cost/unit range.
Adapted from USAID (2007), Exhibit 12, p. 25
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Example of MCA grid (2)
Objective
Weights
Project
option 1
Project
option 2
Project
option 3
Reducing flood damage
x3
4
3
5
Reducing extension of
flooded area
x2
5
3
0
Gaining land for
agriculture
x1
3
2
-2
Maintaining
groundwater level
x1
-3
-2
0
Securing livelihood of
fishery communities
x1
-4
-3
2
Preserving biodiversity
x2
-3
-2
-1
2
1
4
Total score
Turning words into action
Costing, assessing and selecting
environmental and climate change adaptation
& mitigation options and measures
What can be done and what are the
institutional and capacity needs in
your country/sector of responsibility?
27
Recap –
Key messages
• Cost-benefit analysis and cost-effectiveness
analysis support the identification of financially and
economically viable adaptation and mitigation
options/measures
• Help prioritise actions based on financial/economic
criteria
• Multi-criteria analysis, used alone or in combination
with CBA or CEA, supports the assessment and
prioritisation of options based on multiple criteria
• Technical, environmental and social criteria can be
considered alongside financial/economic ones
• Pro-poor implications must be taken into
consideration when prioritising measures
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Key references
• Economics of Climate Adaptation Working Group (2009)
Shaping climate-resilient development:
a framework for decision-making. Climate Works Foundation, Global
Environment Facility, European Commission, McKinsey & Company,
The Rockfeller Foundation, Standard Chartered Bank & Swiss Re.
Available from:
http://www.mckinsey.com/clientservice/Social_Sector/our_practices
/Economic_Development/Knowledge_Highlights/Economics_of_clim
ate_adaptation.aspx
• MDG Needs Assessment Tools:
http://www.undp.org/
• World Bank – Economics of Adaptation to Climate Change web
pages: http://climatechange.worldbank.org/content/economicsadaptation-climate-change-study-homepage
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References
•
Hanley, N; Shogren, J and White, B (2013) Introduction to Environmental Economics.
2nd edition, Oxford University Press: Oxford.
•
Kroeza, C and Fortuin, K (nd) Multi Criteria Analysis. Environmental Systems Analysis
presentation, Wageningen University, The Netherlands.
•
Mayaux, P (2006) Millennium Ecosystem Assessment: overview of findings. Institute
for Environment and Sustainability, Joint Research Centre; Ispra, Italy. Presentation
made at AIDCO, Brussels, 26 June, 2006 (Dejeuner su l’herbe conferences).
•
McKinsey & Company (2009) Pathways to a Low-Carbon Economy: Version 2 of the
Global Greenhouse Gas Abatement Cost Curve. Available from:
http://www.mckinsey.com/globalGHGcostcurve
•
MillenniumProject (2004) Millennium Development Goals Needs Assessment
Methodology. Available online from: http://www.unmillenniumproject.org/ [Accessed
20 February 2013]
•
UNDP MDG Needs Assessment Tools, available from:
http://www.undp.org/content/undp/en/home/librarypage/povertyreduction/mdg_strategies/mdg_needs_assessmenttools/mdg_needs_assess
menttools.html
•
USAID (2007) Adapting to Climate Variability and Change: A guidance manual for
development planning. United States Agency for International Development,
Washington, DC. Available from: http://pdf.usaid.gov/pdf_docs/PNADJ990.pdf
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